March, 1999Stephen H. Cypen, Esq., Editor
1. RECALCULATED DISABILITY PENSION NOT TAXABLE: In a very important decision, the U.S. Court of Appeals for the Ninth Circuit has ruled that reduction of an individual's disability retirement benefits on the 25th anniversary of his date of hire was not a determination of benefits based on his length of service and therefore remained excludable from tax under IRC Section 104(a)(1). The key: the benefits were neither determined by reference to his age nor length of service and thus did not convert into a service retirement pension. Following provisions of the pension plan that permitted recalculation of disability benefits to an amount equal to the benefit that would have been received after twenty-five years of service, the city reduced a retired police officer's benefits from 75% to 50%. IRS (naturally) determined that the city's recalculation converted the pension from disability to service, thus disqualifying favorable treatment under IRC Section 104(a)(1), which excludes from gross income money received under workers' compensation-like acts that are not determined by reference to an employee's age and length of service. In some rather astute reasoning, the appellate court reversed the Tax Court ruling, holding that recalculated benefits were determined by date of hire rather than by reference to age or length of service. Reduction in benefits, creating parity between disabled and service retirees, did not, by itself, amount to a conversion of benefits. Bravo. Picard v. Commissioner, Case No. 97-70954 (9th Cir., January 26, 1999).
2. WHISTLE-BLOWER'S ACT WAIVES SOVEREIGN IMMUNITY: Although the State of Florida generally has sovereign immunity from suits brought against it, Article X, Section 13, of the Florida Constitution provides that "provision may be made by general law for bringing suit against the state as to all liabilities now existing or hereafter originating." A recent appellate court decision found that the Florida Whistle-blower's Act, Sections 112.3187-112.31895, Florida Statutes, clearly and unequivocally waives sovereign immunity for the purposes of the remedies (filing a complaint) and relief (reinstatement and compensation) afforded by the statute. Department of Health and Rehabilitative Services v. Irven, 24 Fla. L. Weekly D247 (Fla. 2d DCA, January 22, 1999).
3. PRIVATE WHISTLE-BLOWER'S ACT DIFFERS FROM PUBLIC WHISTLE-BLOWER'S ACT: Sections 448.101-448.105, Florida Statutes, comprise the "Private" Whistle-blower's Act; sections 112.3187-112.31895, Florida Statutes, the "Public" one. The two acts significantly differ. The Public Whistle-blower's Act specifically provides that the legislature intended to protect an employee who discloses information to an appropriate agency alleging improper use of governmental office, gross waste of funds or any other abuse or neglect of duty on the part of an employee. On the other hand, the plain and unambiguous terms of the Private Whistle-blower's Act state that an employee has protection under the act for objecting to unlawful acts of his employer. Thus, a trial court properly dismissed a Private Whistle-blower's action where the complaint did not allege that the employee was terminated for objecting to illegal activity of the employer or that employer ratified the illegal conduct of its employees. Sussan v. Nova Southeastern University, 24 Fla. L. Weekly D230 (Fla. 4th DCA, January 20, 1999).
4. P&I RANKS LARGEST FUNDS: Following its annual tradition, Pensions & Investments has listed the nation's 1,000 largest employee benefit funds. Totalling almost $4.4 Trillion, pension fund assets are generally broken down into defined benefit ($3.4 Trillion) and defined contribution ($1 Trillion). The ten largest public funds are CalPERS - $133.5 Billion, New York State Common - $99.7 Billion, CalSTRS - $82.6 Billion, FRS - $77.5 Billion, New York State Teachers - $71.1 Billion, Texas Teachers - $69.5 Billion, New Jersey State - $63.3 Billion, New York City Retirement - $55.2 Billion, Wisconsin Investment - $50.9 Billion and Ohio Employees - $47.5 Billion. Meanwhile, at $87 Billion, General Motors is the largest corporate plan. The Federal Retirement Thrift ($64.5 Billion) is listed in the "miscellaneous" category. All figures are as of September 30, 1998.
5. ADRs OR NEW YORK SHARES?: Now that Chapter 98-134 has amended Sections 175.071 and 185.06, Florida Statutes (1998), to allow trustees to invest up to 10% of plan assets in foreign securities (see Special Supplement to C&C Newsletter dated May 28, 1998, pages 5-6), if trustees decide to make foreign investments they must decide how to make them. A recent Newsletter discussed a negotiable instrument known as an American Depositary Receipt (ADR) (see C&C Newsletter for December, 1998, item 1). We have recently been made aware of another type of instrument called a "New York Share." Instead of American Depositary Receipts, non-U.S. companies may issue New York Shares to be listed on a U.S. Exchange. While New York Shares offer many of the same benefits that ADRs offer and operate similarly to them, they are not quite as efficient due to the extra steps involved in cross-border settlement and registration. Also, New York Shares offer the issuing company less flexibility to "Americanize" it shares than do ADRs. Finally, New York Shares are not registered under the Securities Act of 1933, meaning that investors will not receive the disclosures required by that Act. Nevertheless, some trustees are looking into New York Shares as a viable alternative to American Depositary Receipts. To our knowledge, no trustees are seriously considering directly purchasing ordinary shares in markets outside the U.S.
6. WYOMING GOES "PRUDENT INVESTOR": The Wyoming Legislature has approved a "prudent investor" standard that will allow state trust funds greater flexibility in making investments. A prohibition on international investments and restrictions on quality of domestic securities would be lifted for the state's two funds, which aggregate about $2.5 Billion.
7. SOFT-DOLLAR BROKERS UNDERPERFORM OTHER TYPES OF BROKERS, ACCORDING TO STUDY: From a total trading cost perspective, soft-dollar brokers underperform most other types of brokers, according to a study by two university professors. Most investors are willing to pay more in commissions when they use soft-dollars because they believe they are getting additional services. However, the study reveals that if they thought higher commissions were the extent of the additional costs, they are missing a big part of the picture. On average, a soft-dollar broker costs about ten basis points more than a full-service broker. Plan Sponsor featured the report in its February 1999 issue.
8. ACTUARIAL METHOD CHANGES COULD COST LACERA BIG TIME: Following on the heels of last March's $1.2 Billion miscalculation (see C&C Newsletter for March, 1998, page 6), $25 Billion Los Angeles County Employees' Retirement Association is facing an additional $2 Billion funding level plunge. The drop results from proposed changes in actuarial valuation methods recommended by LACERA's new actuary. If adopted, the changes would result in a reduction in funded status from 103% to 93%. There is talk that the trustees might reject the proposed changes and retain those used by its previous actuary -- the one which made the "relatively simple mathematical error" in computer coding that caused last year's brouhaha. As before, the story was reported by Pensions & Investments.
9. PUBLIC EMPLOYEES "ESCAPE" SOCIAL SECURITY INCLUSION --FOR NOW: Representatives of state and local retirement plans are resting easy now that the administration's Social Security proposals do not include any provision mandating that new state and local public employees be brought into the system. However, organizations such as National Conference on Public Employee Retirement Systems, National Association of State Retirement Administrators and National Council on Teacher Retirement remain vigilant because Congress may still seek to include such a provision in future legislation. We believe that including state and local hires would adversely affect them and would add to Social Security's woes rather than eliminate them. Even Social Security's own figures show that, at best, a proposal of this nature would only alleviate 10% of Social Security's projected deficit. Meanwhile, Colorado is attempting to head off any potential problems of mandatory Social Security coverage by state legislation that would exclude police officers and firefighters from such federal legislation. While we doubt the validity of such legislation, fortunately it looks like that issue will not have to be decided, for the moment.
10. MARKET-ADJUSTED INSTITUTIONAL INDEXED ASSETS DECLINE IN LATTER PART OF 1998: Institutional tax-exempt indexed assets increased almost 7% in the second half of 1998, to more than $1.3 Trillion. But when adjusted for market growth, overall institutional indexed assets actually declined 3.5% for the seven-month period ended December 31, according to a Pensions & Investments survey. The largest drop was in the largest category, domestic indexed equity, which fell 4%. The almost-$1 Trillion in such category accounts for over 70% of all indexed assets.
11. EMPLOYEES WOULD RATHER HAVE BETTER BENEFITS THAN HIGHER SALARIES: Contrary to our own personal observations, a recent survey shows that over half of workers between ages 25 and 33 would take jobs with lower salaries but excellent retirement benefits rather than positions with higher salaries and poor retirement benefits. As to those between 34 and 52, 64% feel the same way. (There may be an explanation as to why the younger group responded as it did: almost one-third said their main motivation for participating in a company retirement plan was the ability to borrow against it!) Pensions & Investments reported the survey of five hundred employees of small and midsized businesses.
12. PUBLIC PENSION FUNDS MAY FACE SEC "PAY-TO-PLAY" RULES: Making good on a promise by its chairman (see C&C Newsletter for February, 1999, Item 2), the Securities and Exchange Commission may propose "pay-to-play" rules. According to BNA, SEC's area of concern is the practice of requiring, either expressly or implicitly, municipal securities participants to make political contributions to officials in order to be considered for work. Although there is an SEC rule prohibiting municipal securities dealers from engaging in municipal securities business for two years after contributions are made, SEC is turning its attention to the action of investment advisors and other vendors in the public pension fund arena. Under the Investment Advisers Act of 1940, money managers have a fiduciary duty to their clients (that is, pensioners) that may be compromised if the selection process is corrupted.
13. BULLETIN, BULLETIN, BULLETIN ... CHICAGO'S DALEY RE-ELECTED: Meanwhile, in a seemingly-unrelated story, on February 23 Chicago Mayor Richard M. Daley was re-elected. So? Well, money managers and stock exchanges donated more than $90,000.00 to his re-election campaign. Eight of the money managers actually handle money for city pension funds. A 1987 city ordinance limiting companies that have done or have sought to do business with the city from contributing more than $1,500.00 to any person seeking public office has an apparent loophole in that individuals are not limited, reports BNA. One other thing. The Mayor's opponent did not receive a penny from any money managers.
14. PUBLIC PENSION PLAN MEMBERSHIP TOPS FIFTEEN MILLION!: According to statistics released by the Census Bureau and reported by BNA, in 1997 membership in state and local government employee retirement systems reached an all-time high of more than fifteen million. The following tables contain information on state and local government employee retirement systems, summarized for the country and for each state: summary of state and local government employee retirement system finances; revenues of retirement systems by state and level of government; expenditures of retirement systems by state and level of government; cash and investment holdings of retirement systems by state and level of government; and number and membership of retirement systems by state. You can check out these tables on the internet at http://www.census.gov/govs/www/index.html.
15. SECOND CIRCUIT HOLDS THAT ELEVENTH AMENDMENT DOES NOT IMMUNIZE STATE FROM ADEA CLAIM: Conflicting with a recent decision of the U.S. Court of Appeals for the Eighth Circuit (see C&C Newsletter for November, 1998, item 26), the U.S. Court of Appeals for the Second Circuit has held that states charged with violating the Age Discrimination in Employment Act do not have immunity under the Eleventh Amendment to the Constitution. (Remember that Section 5 of the Fourteenth Amendment to the United States Constitution gives Congress the power to abrogate the states' sovereign immunity under the Eleventh Amendment if Congress unequivocally expresses that intent and validly exercises its enforcement power.) Following a majority of other courts that have decided the same issue, the Second Circuit found that ADEA was properly adopted pursuant to Section 5 of the Fourteenth Amendment. Cooper v. New York State Office of Mental Health, Case No. 97-9433 (2d Cir., December 23, 1998).
16. BUT U.S. SUPREME COURT WILL RESOLVE CONFLICT: The United States Supreme Court will use decisions of the U.S. Court of Appeals for the Eleventh Circuit (arising in Florida) to harmonize conflicting Court of Appeals decisions on the issue of whether the Eleventh Amendment to the U.S. Constitution immunizes states from Age Discrimination in Employment Act claims. Of the Courts of Appeals that have ruled on the issue, only the Eleventh and Eighth Circuit have found Eleventh Amendment-immunity from age bias suits. The Second, Fifth, Sixth, Seventh, Ninth and Tenth have all held that ADEA trumps the immunity issue. The other circuits have cases pending or have not decided the issue. Kimel v. Florida Board of Regents, Case No. 791, cert. granted (U.S., January 25, 1999) and U.S. v. Florida Board of Regents, Case No. 796, cert. granted (U.S., January 25, 1999).
17. GFOA PUBLISHES GOVERNMENT EMPLOYERS GUIDE: The Government Finance Officers Association has published a revised edition of Taxation of Employee Fringe Benefits: A guide for state and local government employers. The 165-page volume provides government employers with information as to whether benefits such as vehicles, insurance, dependent care assistance, tuition and deferred compensation are subject to federal taxation. It also tells how to determine value, what to withhold and how to report to employees and to IRS. According to BNA, the publication is available to GFOA members for $35.00 and to non-members for $45.00. Readers can reach GFOA by e-mail at PublicationOrders@gfoa.org or by telephone at 312.977.3700.
18. CHANGE IN RETIREE HEALTH BENEFITS VIOLATED UNION CONTRACTS: A report from BNA indicates that Schenectady, New York, violated police and firefighter union contracts when it changed the health benefits of retired police officers and firefighters. From 1969 through 1989 union contracts all contained the identical language: "[the city] at its own expense shall provide hospitalization and major medical insurance with coverage equivalent to the plan presently in effect for each member of the department and his family, and for retired members and their families." In 1990, the city changed the plan to require increased co-payments by participants. The appellate court affirmed the lower court's summary judgment in class actions filed by retired police officers and firefighters. Rocco v. City of Schenectady, Case No. 82298 (NY Sup. Ct, App. Div., December 30, 1998).
19. SEVERANCE PAY TAXABLE: The U.S. Court of Appeals for the Fifth Circuit has decided that the entire amount of a separation severance payment given to a taxpayer upon termination of employment is taxable as income. The payment was made in conjunction with a separation and release agreement signed contemporaneously with termination of employment. The employee urged excludability under IRC Section 104(a)(2), but that section deals with damages for personal injury and requires the existence of a justiciable claim and an express settlement of such claim. Ball v. Commissioner, Case No. 98-60263 (5th Cir., December 31, 1998), was reported by BNA.
20. YOU DON'T HAVE TO BE "RETIRED" TO RECEIVE RETIREMENT DISTRIBUTION...AGAIN: A "transfer refund" distribution received by a taxpayer from the Maryland State Retirement System when she transferred to the Maryland Teachers' Pension System was a "retirement distribution" from a qualified plan subject to taxes under IRC Section 4980A. That section defines retirement distribution as the amount distributed during the taxable year under a qualified employer plan with respect to which the individual is or was an employee. And a retirement plan is deemed to be a qualified plan, even if it is not qualified on the date of distribution, so long as the IRS at any time had determined that the plan was qualified. Guyton v. United States, Case No. JFM-97 969 (D. Md., December 17, 1998). Over two years ago we expressed disbelief at a similar unpublished decision, which too was reported in BNA (see C&C Newsletter for December, 1996, page 3).
21. AFL-CIO CALLS FOR STRENGTHENING DB PLANS: Citing a decline in sponsorship of defined benefit plans combined with low wages for the average worker, AFL-CIO President John Sweeney has expressed concern that "two legs of the retirement stool," private pensions and individual savings, have been weakened. Social Security, of course, is the third leg. For the past twenty years, defined benefit pension plans have been on the decline because private sector employers have been squeezing wages as well as benefits, leaving workers without enough money left to save. Promoting DB plans has been a high priority for the giant union, according to BNA.
22. WILL BOOM TIMES WIPE OUT GOVERNMENT DEBT?: If the United States' booming economy continues, the federal government could be debt-free in the year 2014 (for only the second time in our history). If politicians simply leave current policies alone, the Office of Management and Budget projects that the $3.7 Trillion debt held by the public will be wiped out by 2014. The Congressional Budget Office is more optimistic, predicting freedom from debt by 2012. The national debt is actually at $5.6 Trillion, but that amount includes $1.9 Trillion in debt held by Social Security in government bonds -- sort of a "wash." A history of the national debt reveals a history of the nation: 1860-1866, debt increased from $65 Million to $2.8 Billion (Civil War); 1916-1919, from $1.2 Billion to $25.5 Billion (World War I); and 1940-1944, from $42.8 Billion to $185 Billion (World War II).
23. BUCK SURVEYS ECONOMIC ASSUMPTIONS: Buck Consultants, Inc. has released its most recent survey on defined benefit plan actuarial assumptions as to funding interest rates, salary increase rates and actuarial cost methods. Covering the 1997 plan year, the survey dealt with a cross-section of industries. The average funding interest rate for plans surveyed was 8.20% as compared to 8.19% for 1996. The highest concentration of plan sponsors (31%) used a funding interest rate of 8.50% for 1997. The average salary increase rate was 5.30% as compared to 5.37% for 1996. Most plans surveyed for 1997 (73%) used the accrued benefit (unit credit) actuarial cost method for determining contributions. The frozen initial liability method was a distant second at 15%.
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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.